U.S. GOVERNMENT PRINTING OFFICE

60–950 WASHINGTON : 1999

TREASURY DEPARTMENT REPORT ON INNOCENT

SPOUSE RELIEF

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

FEBRUARY 24, 1998

Serial No. 105–92

Printed for the use of the Committee on Ways and Means

(
(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the

Committee on Ways and Means are also published in electronic form. The printed hearing

record remains the official version. Because electronic submissions are used to prepare both

printed and electronic versions of the hearing record, the process of converting between various

electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.
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C O N T E N T S

Page

Advisory of February 19, 1998, announcing the hearing ..................................... 2

WITNESSES

U.S. Department of the Treasury, Hon. Donald C. Lubick, Assistant Secretary

for Tax Policy ........................................................................................................ 7

U.S. General Accounting Office, Lynda D. Willis, Director, Tax Policy and

Administration Issues, General Government Division; accompanied by

Ralph Block, Assistant Director, Tax Policy and Administration Issues,

General Government Division, San Francisco, California, and Jonda Van

Pelt, Senior Evaluator, Tax Policy and Administration Issues, General Government Division, San Francisco, California ..................................................... 33

SUBMISSIONS FOR THE RECORD

American Institute of Certified Public Accountants, statement .......................... 67

Koss, Freya B., Wynnewood, PA, letter and attachments .................................... 74

O’Connell, Marjorie A., O’Connell & Associates, statement and attachments ... 81
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TREASURY DEPARTMENT REPORT ON

INNOCENT SPOUSE RELIEF

TUESDAY, FEBRUARY 24, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:07 p.m., in room

B–318, Rayburn House Office Building, Honorable Nancy L. Johnson [Chairman of the Subcommittee] presiding.

[The advisory announcing the hearing follows:]
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Chairman JOHNSON of Connecticut. Good morning. The hearing

will come to order.

As the Congress develops legislation to restructure and reform

the Internal Revenue Service, we have learned of a number of disturbing cases in which taxpayers have been grossly mistreated by

the IRS. Out of all the horror stories that have surfaced in recent

months, none have been more heartbreaking than those involving

innocent spouses—taxpayers who in many cases have been left to

rear children as single parents, often without child support, only to

find that their former spouses have saddled them with a crushing

debt. Many of these horror stories have been going on for years

without the IRS helping the spouses who are seeking relief from

mounting tax liabilities, interest, and penalties. I have seen dozens

of letters from innocent spouses who find themselves in this sort

of jam—and I really do mean dozens.

I also want to just stray from my written statement to share

with you one of those letters. It says, ‘‘I was so thrilled to see an

article in USA Today regarding your organization. I started to feel

like the Lone Ranger. It’s good to know that I’m not alone, and that

others are outraged by the treatment of innocent spouses, and attempting to effect a change in the system.’’ This comes from a

woman from California. ‘‘I’m a single mother with one daughter at

NYU on scholarship, a daughter who’s graduating from high school

this year, and a 6-year-old son. I get very little child support and

struggle to make ends meet every month. My ex-husband was selfemployed during several years of our marriage and did not pay his

taxes because he was a cocaine addict. He accrued a debt of

$14,000 to the IRS and $8,000 to the Franchise Tax Board during

the years that we were married.

‘‘I, on the other hand, worked diligently, and had the usual taxes

taken out of my pay. In addition, I put money into a 401(k) at work

for our children’s college education, so that he could not touch it

and blow it all up his nose.

‘‘Since our divorce, he has cleaned up his act. We had a meeting

with the IRS together, and he told them that he was a cocaine addict, and that he was the one that did not pay his taxes, and wanted to take full responsibility for the entire debt. They agreed and

had me fill out some forms.

‘‘One of the questions on the form asked if I had a thrift savings

plan. When the IRS agent saw that I had one, her eyes lit up like

a Christmas tree. She indicated that they were going to levy all of

my 401(k) and take the money out. I started crying hysterically,

and just after destroying my life, the agent said, ‘Sweetheart, Jesus

will see you through this.’

‘‘She retired and there was a new agent that took her place. I

was crying on the phone when discussing the case with her, and

she said, ‘Miss Smith, it’s not that big a deal. I refuse to talk to

you if you’re going to cry.’ ’’

She goes on with some other things, and in the end, she was

forced to file bankruptcy, to stop the levy on her 401(k) and the

garnishment of the Franchise Tax Board, and so on. I mean, this

is unconscionable, and I know there is no one in the Congress and

no one in the IRS that would defend it, but when you get as many

letters as this committee has gotten on this issue, and as many let-
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ters, and have seen as many cases as individual Members have

seen, you know that this is one of those horrendous problems that

simply must be solved.

As Elizabeth Cockrell, who started an organization called Women

for IRS Finance Equity, testified before the Senate Finance Committee recently, ‘‘All they’’—that is, many of these women—‘‘are

guilty of is trusting their husbands and signing a joint tax return

with him.’’

I had hoped we could address this problem when the subcommittee began developing recommendations for the Taxpayer

Bill of Rights 2 nearly three years ago, but I was persuaded that

the issues associated with joint and several liability were so complex that we should not act in haste. We, therefore, asked the

Treasury Department and the General Accounting Office to help us

better understand these issues.

On July 30, 1996, the President signed the Taxpayer Bill of

Rights Act 2 into law. The law directed both the GAO and Treasury to study the innocent spouse issue and report back to us within

six months; that is, by January 30 of 1997, more than a year ago.

The GAO’s report was issued on March 12 of 1997, and Treasury’s

report was on my desk February 9 of 1998, over a year late.

During that year, the National Commission on Restructuring the

IRS issued a report; the Subcommittee on Oversight developed

TBOR 3 recommendations; the Committee on Ways and Means has

reported the IRS Restructuring and Reform Act, and the Clinton

administration has supported that reform and approved and sent

H.R. 2676, the IRS restructuring bill, to the Senate—all without

the benefit of the Treasury’s guidance on the innocent spouse issue.

You’ll remember that we have made a little progress on the innocent spouse issue in these bills by working together, but it has been

minimal. I have been very disappointed that the Treasury couldn’t

have come forward with their report on time. I truly believe that

the kinds of cases, the kinds of families that have been affected by

the innocent spouse provisions represent some of the Americans

that are simply most abused by the greatest free nation in the

world. It is saddening; it is embarrassing; it is intolerable, and we

have to change it.

I welcome the Treasury here today to share with us their report

and their recommendations. Overdue as they may be, they, nonetheless, are welcome. We do intend to work with you. We hope that

we can do this in such a way that it could still be part of the IRS

reform as it moves through. I know that the Senate had earlier

hearings, that they could try to get it into their form of the IRS

restructuring bill. And while you are a day late, I hope you’re not

a dollar short in the quality of your recommendations.

Thank you very much for being here, Mr. Lubick, and before you

proceed, let me recognize Bill Coyne, my ranking member of the

Oversight Subcommittee of Ways and Means. Bill?

Mr. COYNE. Thank you, Madam Chairwoman.

Today the Ways and Means Subcommittee on Oversight will discuss two excellent reports recently issued by the Department of

Treasury and the U.S. General Accounting Office. I look forward to

receiving the experts’ views on ‘‘joint liability’’ issues raised by
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married individuals filing joint returns and innocent spouse issues

raised under current law and in proposals for reform.

I am particularly pleased to note that the innocent spouse legislative recommendations discussed in the reports are included in

our House-passed ‘‘Taxpayer Bill of Rights 3’’ legislation pending

before the Senate. To summarize, the bill expands the availability

of innocent spouse relief by, No. 1, eliminating the various dollar

thresholds; No. 2, broadening the definition of eligible tax understatements, and three, providing partial innocent spouse relief in

certain situations, and No. 4, providing tax court jurisdiction over

denials of innocent spouse relief.

In addition, I want to mention that the President’s Fiscal Year

1999 budget contains an additional proposal to expand innocent

spouse relief, which should be enacted into law. The proposal would

suspend collection actions, in a joint liability case while one spouse

is contesting the tax liability in Tax Court.

Finally, IRS Commissioner Rossotti announced last month that

the IRS is developing a special form and administrative process to

facilitate claims for innocent spouse relief.

Our bipartisan efforts to initiate, and follow up on, pro-taxpayer

legislative reforms have been successful, and must continue.

Thank you.

Chairman JOHNSON of Connecticut. Ms. Thurman, do you have

an opening comment?

Ms. THURMAN. No.

Chairman JOHNSON of Connecticut. OK. Mr. Lubick.

STATEMENT OF DONALD C. LUBICK, ASSISTANT SECRETARY

FOR TAX POLICY, U.S. DEPARTMENT OF TREASURY

Mr. LUBICK. Thank you, Madam Chairman, Mr. Coyne, Mrs.

Thurman. I am pleased, finally, to be here to discuss our report on

innocent spouse issues. As my written statement, submitted for the

record, indicates in quoting Secretary Rubin, it is imperative that

we protect taxpayers whose spouses violate the tax laws without

their knowledge, and we assure you that both Treasury and IRS

are committed to taking steps to achieve this goal and to working

with the Congress to find a solution.

I apologize for the lateness of this report. In point of fact, the essence of it was in my hands last April, and I think I mentioned this

to you several times. We continued to search and explore every possible way to make the relief as meaningful and as broad as possible. And, indeed, the matters that were included in your markup

of the restructuring bill were matters which we, indeed, with you,

had recommended. But we promise you now that we will work with

the greatest speed and diligence to complete the job.

The report I believe you have. In its detail it speaks for itself.

I do wish to take some time this morning to summarize the principal issues raised by the report and its conclusion.

We start with the basic notion that the general rule under

present law, and one which we think is appropriate, is that married couples ought to be able to file a joint return with all of their

income and deductions as one, and we recognize that to make that

effective, the general principle ought to be joint and several liability for the taxpayers filing that return.
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There are a number of reasons for this. One is that we think it’s

essential to preserve the simplicity of a married couple as an economy unit filing one return instead of two returns, or perhaps even

three. We want to avoid the complexity that be required if we had

to make specific allocations of items of deduction and credit, in particular, and we want to encourage the allowance of the offset of

items of deduction and credits against the income and tax liabilities of the combined unit.

We want also to reduce the administrative demands on the Internal Revenue Service. In 1996, there were 49 million joint returns

filed by married couples. If we were to abandon the principle of

joint filing, under some circumstances it might require the IRS to

deal with separate returns, much closer to 100 million returns, and

that, of course, would make obvious difficulties for the administration of the tax law.

The principle of filing a joint return was first enacted in 1948,

and it accomplished its purpose of achieving equality between the

common-law States, which are most of the States of the United

States, and those community-property States, where married taxpayers, before the 1948 act, had the advantage of splitting their income and achieving a much lower rate of taxation than those in the

common-law States.

We believe that joint and several liability in the case of taxpayers filing a return is necessary to prevent manipulation. In the

collection area, if we did not have that, it would be very possible

for interspousal transfers to occur, which can be done currently

without any gift or estate tax consequences, in order to avoid collection. If the tax liability is separated from the assets, that would

jeopardize the revenue.

The signers of a tax return should assume the liability on the tax

return because they receive all of the various benefits of filing

jointly—the ones I’ve outlined of common pooling of income and deductions, the benefits of split income, which in the case of most

married couples provides a bonus of tax liability.

Then, too, I think it is important in the administration of the tax

laws that the return have legal significance and that taxpayers attest to its veracity and be encouraged to be aware of what is in the

return.

In addition, separating liability could, indeed, as we will see as

I go through some of the other alternatives, have the result of not

particularly benefiting one spouse or the other, but rather in the

collection area of benefiting other creditors of the marital community, at the expense of the IRS, and I think it’s inappropriate, the

IRS being an involuntary creditor.

And, finally, we would certainly preserve the option of present

law to permit married couples to file separately. So if there is, indeed, a particular situation, even though it may involve the loss of

some particular benefits, the privilege of filing separately would remain as it has since 1948.

That brings us to the innocent spouse situation, and that rule

has developed as an equitable rule. I recall, incidentally, when this

issue first came before the Treasury Department by a lawyer in

New York, Lillian Vernon, who came to our office in 1963 to press
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for a change in the code. We didn’t make it while I was here, but

in 1971 the origins of the present law did come into the statute.

We believe that where it is inequitable to hold a victimized

spouse liable for a tax liability caused by his or her—and usually

her—spouse who has deluded or defrauded both her and the Government, we should afford relief, carefully-targeted relief, although

we would, in general, preserve the rule of joint and several liability.

Now let me review what some of the alternatives are, which are

discussed in the report, and let me see how they test up against

this general standard.

One possibility, of course, is to go back to the situation before

1948 by having every taxpayer file as an individual and have separate filing. This could be done either through individual separate

returns or, as some States do, having two or three columns on the

return in which each of the spouses lists his or her separate income, and then there is a column for the aggregate.

The obvious problem with that is that it might require close to

49 million persons to prepare a second return. It would mean that

the IRS would have to process close to 49 million additional returns. The IRS would have to set up close to 49 million separate

accounts, and would have to send notices out separately, perhaps

up to another 49 million taxpayers. And, most importantly, it

might mean the loss of the benefits of the joint return unless the

substantive tax law were changed accordingly. So we ruled out in

the report the notion of going back to separate return filing.

That led us to dealing with the possibility of the filing of a joint

return, but making the liability proportionate. In other words, husband and wife could file a joint return, but their liability would be

separate, based upon some proportion of the income attributable to

each one.

There are two ways in which proportionate liability can be determined. One is what we call front-end proportionate liability. It is

determined at the time of the filing of the return. The difficulty

with that is that, for the vast majority of cases, fortunately, the

issue of liability would never arise. But, nevertheless, if it’s to be

determined at the front end, that increases the paperwork burden,

the complexity of double returns, and that seems to us to be extremely undesirable, both for the taxpayers and the Internal Revenue Service.

Indeed, a separate liability also would in the run-of-the-mill case

simply result in perhaps a preference to creditors other than the

IRS, to private creditors, and we think that is inappropriate.

The allocation in preparation of these returns of deductions between the husband and the wife is a very complicated issue. Unless

one of the married couple earned or received all of the income, one

would have to allocate the deductions in order to determine the

proportionate income of each member of the community.

The most damning principle, however, that we discovered, when

we studied front-end, proportionate liability, is that you would still

need to have the system under the law today of equitable relief for

an innocent spouse, because suppose we have a situation where a

return was filed and the return was inaccurate because of the concealment of income or the claiming of an erroneous deduction by
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one of the spouses, and then the additional liability is discovered.

That means that the total income of the marital community is increased, and if that’s so, when you apply the ratio of income of the

two spouses, even if the additional income is attributable solely to

the one spouse that was concealing the income, it would result in

an increase for the innocent spouse because her proportionate percentage, applied to a larger amount, would increase her liability.

So the result would be that you would have gone through all of

this effort of additional recordkeeping, difficulty of allocations, complications in the tax law, and while there may be a lesser amount

of innocent spouse relief that would be necessary, nevertheless,

there still would be a need to go into all of these questions again

of protecting the innocent spouse.

So then we turn next to the notion of what we call the back-end

proportionate liability, along the lines of the bill which was worked

out by a committee of the American Bar Association. In that situation, nothing would be done at the time of filing a return other

than what is done today. A joint return would be filed. Both members of the marital community would sign it. When the situation

arose that there was an audit by the Internal Revenue Service,

then a determination would be made as to what the proportionate

liability of the two members of the community would be, based

upon the relative proportions of their income.

Again, the rules for allocating income and deductions, particularly those that are generated by joint assets or obligations, would

be quite complex and potentially difficult to administer. The fact is

that most married couples share their economic attributes without

tracing it, and to have to go to tracing means either the maintenance of records and paperwork from the beginning—and most couples at the beginning probably would assume that they weren’t

going to get into this situation, and so it would be a difficult problem to determine the allocation.

Additional assessments could still be made against the innocent

spouse, as I described in the case of a front-end determination, because, again, if the Internal Revenue Service discovered that one

spouse had made an omission from gross income or taken an erroneous deduction, and there was a significant increase in the total

tax liability of the community, the problem is still there. The proportion of the income attributable to the innocent spouse is still

going to be larger than what it was in the case applied to the original return.

On top of that, in many cases refunds would have been issued,

and there are tremendous complications if a refund check was

issued to the couple as to who gets credit for the refund and in

what proportion. We come to the situation that some kind of innocent spouse relief would still be needed. So even in the back-end

proportionate liability, even though the problem isn’t quite as serious as the front-end proportionate liability, you’re still going to

need an innocent spouse relief provision. Given that, that you

would still need to have targeted equitable relief, it seems very unwise to introduce all the complexity to the system that would be

involved in calculating the pro rata liability.

Another type of proportionate liability relief that’s been proposed

was one allowing the taxpayers to allocate the liability between
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themselves, either at the time of the filing of the return or at the

time a dispute arises. The latter is the American Institute of Certified Public Accountants’ proposal, that you allocate at the time

the dispute arises. And, indeed, some have proposed that you follow

the terms of a divorce decree or a divorce settlement in allocating

it.

The problem here, again, is that you’re introducing a situation

that is complex, but more than complex, it’s manipulable. It would

permit in many situations taxpayers to divorce their income tax liability from the underlying assets that should be used to satisfy

them, because, again, assets can be transferred between spouses

without any economic detriment.

And, again, we have found that in the situation, once an allocation is made, there’s still the need for equitable relief, if an adjustment is made later on, when the original allocation was made at

a time that the actual liability was unknown to the innocent spouse

at least. So, again, you’re in a situation where we would need the

equitable relief, and therefore, it’s very questionable that we want

to upset the system, a system that works for almost everyone, simply to target those cases that cry for equity, when we can devise

some relief for those limited number of cases.

A final one, which I will mention only briefly, and it’s also referred to in the GAO report on this subject, is to permit allocation

by the terms of the divorce decree, and that—we share the view of

the GAO that this should be discarded because it means the IRS

becoming a party to protect its interests in about every divorce proceeding that occurs in the country. It seems to us fairly clear that

that is not appropriate.

Now that brings us to what can be done to improve the situation

to avoid cases such as you, Madam Chairman, have described to us

in the letter, such as the ones that were brought to light in a recent hearing of the Finance Committee, and probably the situations

that are referred to in the sheaf of letters which you held up.

And we think there are two approaches here. One is to take

steps administratively, and we have undertaken to do much of that

as far as we can, in cooperation with the Service, and I can assure

you that the Commissioner is very anxious to move this. We are

expediting the issuance of a new form to assist taxpayers in preparing their claims for relief under the innocent spouse provisions.

They’re going to be processed in one central location to ensure we

get technical expertise of the IRS examiner, and that we get consistent treatment for all taxpayers; we don’t have some rogue

agents or collection officers going off on their own with particularly

harsh and stringent application.

We are reviewing all of our current training materials to ensure

that they stress the responsibility of our employees in the IRS to

identify situations where the innocent spouse provisions might

apply, even if the taxpayer is not aware of the process. So where

appropriate, the IRS will provide these taxpayers with assistance

with a new form and help them prepare it.

Telephone assisters will be trained in the innocent spouse provisions, will be available to answer questions through the IRS tollfree telephone system. There will be special training courses on the

innocent spouse provisions to be given to both the collection and ex-
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amination personnel in both their basic training as well as annual,

continuing professional education and training.

We intend to alert couples who file joint returns of the legal consequences of joint filing in the instructions in their tax packages,

and we’re going to revise our publications to make innocent spouses

aware of the relief provisions available to them.

And, finally, we’re going to reach out at both the national and

local levels to community organizations that serve abused or battered spouses to identify those who might qualify for relief under

the innocent spouse provisions.

Now, in addition to that, we are recommending to Congress certain statutory changes to both the innocent spouse rules themselves, and I think most importantly, to the procedures in which

they may be invoked. We recommend legislation, some of which you

have already incorporated in the IRS restructuring bill. The first

one is the elimination of dollar thresholds that bar innocent spouse

relief in some meritorious cases. We’re going to give relief to innocent spouses regardless of the amount.

We propose to liberalize the treatment of erroneous items of deduction and credit, to treat them the same way as omissions from

gross income. Heretofore, there’s been a more stringent test for deductions. It has to be established that they were grossly erroneous,

and we’re now putting that on the same basis as omissions from

income. If there’s simply an erroneous deduction and the other

tests for equitable relief are met, we’d propose, and you have adopted in the IRS Restructuring Act, to give relief.

Some others are not in the legislation. We’ve developed them

since, and we would hope to get them added in the Senate proceedings, and I do not believe we are too late. We would extend the

relief provisions applicable to taxpayers in the community property

States. We want to make them comparable with those applicable

in the common-law property States. Heretofore, because of the peculiar rules of community property, they have not been available

on the same basis as in the common-law States.

As I indicated, what I think is most important are two procedural proposals. We would significantly expand the taxpayers’ procedural opportunities to claim substantive relief by making access

to the Tax Court routinely available, and that, indeed, would suspend collection activity. I think most of the horror cases have come

from Internal Revenue Service collection officers pressing for collection and hounding innocent taxpayers before they ever had a

chance to present the factual situation. This access to the Tax

Court, of course, would mean that there would have to be access

to the higher levels of the Internal Revenue Service, and we will

have available Internal Revenue Service personnel who are thoroughly versed and, indeed, will take an appropriate attitude toward

providing relief through the application of the statutory provisions

as they were intended to be applied. And as Mr. Coyne mentioned,

we would recommend prohibiting collection of the joint liability

from one spouse while the other spouse is contesting that in the

Tax Court.

I think one of the most important things we can do here is to

make sure that the administration of these provisions by the IRS

is fair, is appropriate, and doesn’t take place in an atmosphere of
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pressure without a fair hearing and fair recognition of the situation

of the innocent spouse. So we believe that this will prevent many,

if not most, of the cases of abuse by collection officers that have so

disturbed you as well as us.

This is the program that we would like to move forward with expeditiously, working with you and with the members of the other

body, and we would hope that we would see rapidly these changes

enacted. The ones that we have talked about, incidentally, are not

systemic changes. You all know that the Internal Revenue Service

is in a very difficult situation today in trying to convert its systems

to deal with the year 2000 problem. The proposals which we are

making will not affect the systems, but will make available this equitable relief, and it could be put into effect immediately.

So I’d be very pleased to deal with any questions that any of you

may have.

[The prepared statement follows:]
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Chairman JOHNSON of Connecticut. Thank you, Mr. Lubick. I appreciate the additional recommendations that you have made to the

Senate, and I think they are helpful, but I am extremely disappointed in your testimony in regard to divorce decrees, especially

when within the decree there is clearly an equitable allocation of

responsibility, and the decree addresses specifically tax liability

and allocates it to one partner, I absolutely don’t see how the Government has the right to ignore that.

Now I don’t think it’s too hard to look back at a decree and see

if it was grossly manipulated. I think you’re—what’s the term I’m

looking for?—you’re just moving from the particular to the absurd

to say that the Federal Government would have to become a party

to every divorce action.

Mr. LUBICK. No, it couldn’t.

Chairman JOHNSON of Connecticut. It couldn’t. Of course it

couldn’t.

And in many divorce situations there really aren’t tax liability

issues, but where that has been clearly specified in divorce decree,

it seems to be not a hardship on the IRS at this point in terms of

the changes that confront it, and I, too, don’t want to complicate

its life until we get through the year 2000 changes. But it does not

seem to me a hardship, and where a decision has been made and

a judge has ruled this as fair, a fair distribution of responsibility

among the partners, it positively defies logic that the IRS should

then come in and say, ‘‘I don’t care what the judge says; I don’t

care what responsibilities either partner took on. We’re going after

both of you equally for the tax liability.’’

Where is the IRS’s common sense in this opposition?

Mr. LUBICK. It seems to me, Madam Chairman, with all due respect, that to allow State courts to allocate tax liability which has

otherwise arisen, and is not an innocent spouse situation—if it’s an

innocent spouse situation, I don’t have any problem with that,

where the one spouse was not aware of an omission that was concealed by the other spouse, but I think the present statute would

cover that. But to say that liability that’s already been established,

and there are marital assets for it, the court could as well say,

well, we will take these marital assets and have them paid in satisfaction of that liability. But if the court—and it seems to me the

burden ought to be on the court to make sure, if there are assets

there, that they are satisfied. I don’t see how the IRS as a creditors—other creditors are protected in that situation. The court cannot change the——

Chairman JOHNSON of Connecticut. Well, presumably, the IRS

can go after the spouse who is liable. We’re not saying that the IRS

can’t go after a taxpayer to make good on a liability to the

public——

Mr. LUBICK. But, but——

Chairman JOHNSON of Connecticut. All we’re saying is that if in

the allocation of the liabilities and assets, for instance, in a marriage situation it is agreed that the tax liability must be shouldered

by one spouse, why wouldn’t the public accept that? Why wouldn’t

it be in our public interest to accept that?

Mr. LUBICK. In every other situation, Madam Chairman—the

Visa card liability, suppose there’s a joint liability. The court—and
21

usually in a divorce decree you have the parties negotiating a settlement, and then it routinely goes before the court, and if it’s not

contested——

Chairman JOHNSON of Connecticut. Right, and the goal of the

settlement—that’s a perfectly good example of that, credit card liabilities—the goal of the settlement is to allocate in some fair manner both the assets and the liabilities. So if I am allocated the responsibility to repay $5,000 in credit card debt at 18 percent, and

my spouse is allocated the responsibility to repay $5,000 in taxes,

why later on should the Government be able to come at me for his

$5,000, which he didn’t repay, when I repaid my $5,000, and that

was the deal? I paid this debt; he paid that debt. At a certain point

people need to be able to settle their lives, and if they make that

decision, and the court affirms that it’s equitable, then the IRS’s

responsibility is to make sure that he who is liable for the $5,000

pays the $5,000, and you can attach wages; you can attach assets;

you can do all kinds of things, but why should you have the right

to come after the other spouse who paid their share of the joint liabilities?

Mr. LUBICK. Well, the bank in that situation, if it had the joint

liability, if the bank were not paid, could go after both of them, too.

Chairman JOHNSON of Connecticut. Okay, take another example.

You split the liabilities down the middle. I have to pay half the

credit card debt and half the taxpayer debt; I pay my halves, and

my former spouse doesn’t pay his half of the credit card, but I take

my name off it, so I can control that. The legal document says he

has to pay you the other half. At a certain point we have to provide

closure to people going through divorce, and if their responsibilities

are allocated, you can’t always leave them exposed then to another

set of laws that comes back and says, ‘‘We don’t care what the allocation was or how fair it was or who paid what. You’re going to

pay for this.’’

Now, for instance, according to what you’re saying, these

women—there’s no way she could get out from under her savings—

when, clearly, she paid the taxes on her salary; she saved from that

salary. Her husband acknowledges he didn’t pay his taxes, that he

used it for cocaine instead, wants to assume the debt. And under

all the changes that you have made, there is no way an IRS person,

no matter how much sensitivity training they have received, could

allocate that burden entirely to the husband, with savings sitting

there that was set aside specifically so kids could go to college.

We have to be able under the law to look at responsible behavior

and irresponsible behavior, and one of the things I liked about that

letter was that it was so clear, and there was acknowledgement.

Now is there anything you have told me that would allow the

IRS in that situation to say, fine, you’ve acknowledged it; now

you’re liable, and we’re going to let your wife alone, and we’re going

to let her 401(k) alone?

Mr. LUBICK. Well, obviously, if the IRS came into it right

then——

Chairman JOHNSON of Connecticut. I’m talking about right then.

They came into the taxpayer advocate; he acknowledged—everybody said this is fine; he’s going to take the debt, and then they

saw her 401(k) savings.
22

Mr. LUBICK. If the IRS is a party to it, I would see no problem

whatsoever, and I think there are procedures before the Internal

Revenue Service that would permit agreements like this. Collection

officers make agreements all the time, and if you involve the IRS,

and the IRS is willing to——

Chairman JOHNSON of Connecticut. So could the collection officer

at that point have made the decision, I mean legally——

Mr. LUBICK. Yes, yes.

Chairman JOHNSON of Connecticut [continuing]. That the IRS

funds were off-limits——

Mr. LUBICK. Sure.

Chairman JOHNSON of Connecticut [continuing]. And that the

husband had the liability.

Mr. LUBICK. The IRS can do that.

Chairman JOHNSON of Connecticut. How do we give better guidance to the IRS officer that that’s what they are to do?

Mr. LUBICK. Well, I’m sure we could find a way because I have

had these situations——

Chairman JOHNSON of Connecticut. Because really this person

was forced into bankruptcy because of the right of the IRS officer,

and nothing you’re doing would change that IRS officer’s, in a

sense, burden of responsibility to act in a way that was fair and

equitable.

Mr. LUBICK. But if at the point that you’re arriving at the agreement, and both parties recognize we have a liability to the IRS and

we have a certain amount of assets, you can work that out with

the Internal Revenue Service, and——

Chairman JOHNSON of Connecticut. I don’t see any way, though,

that anything that you’re recommending that would change the

IRS’s view that two divorced people, one of whom was a cocaine addict, have this liability, and so I’m going to allocate it all to you

because you, lady, the good guy who worked hard and paid your

taxes and saved for your kids’ education, clearly were doing the

right thing. I don’t think under the current law the IRS officer

could in good faith make such a one-sided decision, and you think

they could?

Mr. LUBICK. I think, if I understand you correctly, what you’re

talking about is the situation where you have a——

Chairman JOHNSON of Connecticut. You have a clear excuse——

Mr. LUBICK. You have a letter.

Chairman JOHNSON of Connecticut [continuing]. Clear recognition on the other side.

Mr. LUBICK. You have a creditor who has a liability that’s recognized, and it’s a liability of both parties. The parties are going to

divorce. They’re going to——

Chairman JOHNSON of Connecticut. But this letter was served

after the fact, as I gathered.

Mr. LUBICK. Well, that’s the problem. It doesn’t seem to me,

under the law in the United States, with respect to any creditor,

whether it’s the IRS or a bank or any other creditor, as to whom

there is liability of both parties, that a court, in the absence of that

party, can change that liability.

Chairman JOHNSON of Connecticut. Switching from the court for

a minute, because I think that is a different issue, and I think we
23

have a right to give guidance to the IRS on that issue. But severing

that for a moment, my question to you was: Can you foresee under

any circumstances—first of all, there is no change that you’re recommending that would free the IRS agent, in light of those 401(k)

savings, to completely, in a sense, free the woman from this case,

and have the settlement entirely with the husband at maybe $100

a month for 10 years?

Mr. LUBICK. Well, if the IRS participates in a settlement arrangement like that, the IRS can do that; the collection officers

have that authority. They can——

Chairman JOHNSON of Connecticut. So the collection officers

could agree to such a settlement?

Mr. LUBICK. Yes.

Chairman JOHNSON of Connecticut. Okay. One last question, and

then let me go on, because I know other people have questions. The

taxpayer advocates, when they were testifying before us and talking with us, they recommended that taxpayers who filed a joint return be allowed to subsequently change their filing status to married, filing separately, in cases where one spouse would be unfairly

saddled with a joint tax liability. Now if you—this seems to me

very logical, because while I understand what you’re saying about

paperwork and allocation and all that stuff, there are other situations in which you can go back and view your tax obligations retroactively differently. And if you allowed a certain period of time

when married, filing jointly, could be changed to married, filing

separately, it’s a relatively narrow window, and the allocation

issues, while serious, are not impossible and they’re not a lot different than goes on in the settlement process anyway. Why couldn’t

we use that mechanism suggested by the taxpayer advocate of allowing retroactive married, filing separately, as a way of resolving

this between the two people and the IRS?

Mr. LUBICK. I think the problem is that allowing the parties subsequently to change their returns would allow them—would open

the door to very collusive transactions. As I said, assets could be

transferred freely between spouses, and——

Chairman JOHNSON of Connecticut. I understand that.

Mr. LUBICK. If in the interim the assets get separated from the

tax liability, you have a situation where the only party losing is the

Government. It’s a way of avoiding taxes. The parties simply shift

the tax liability through the separate returns non compos tunc ex

post facto.

Chairman JOHNSON of Connecticut. I’ll leave it to other people

now, but, you know, I hear what you’re saying about that, about

manipulation. On the other hand, there are cases—and that letter

kind of gave one, I mean, assuming it’s as simple as that letter,

and I understand that behind it could be very complicated. But

where one person acted responsibly and actually paid taxes on all

her wages, and if they have the right to file jointly, she would go

back, record her income, record her taxes paid, and so on. And he

would have to do the same. Now, presumably, there is some recollection and some record of his income, and, clearly, a record of no

taxes withheld.
24

So it just seems to me that there are ways to simplify this, and

we’ve got to do better than the recommendations that you’ve proposed. That’s where my thinking is now.

Mr. LUBICK. Well, we would provide that innocent spouse relief

extends not only to understatement on the return, but also to underpayments. I don’t know whether in the case you’re talking about

it would be—that she wouldn’t know that he hadn’t paid the taxes

that——

Chairman JOHNSON of Connecticut. Well, that was the implication; we don’t know that, right?

Mr. LUBICK. Yes. Yes, I think so. So, therefore, I think what we

had proposed for the innocent spouse relief would include understatements. I don’t know exactly on all of the facts, but I think

there’s a possibility that our proposal might cover that situation.

Chairman JOHNSON of Connecticut. Thank you. Sometimes it’s a

blessing not to be a tax lawyer. [Laughter.]

Although, on the other hand, you can make some mistakes, and

I appreciate that.

Mr. LUBICK. It’s quite normally a blessing not to be one, I can

assure you.

Chairman JOHNSON of Connecticut. Mr. Coyne?

Mr. COYNE. I have no questions.

Chairman JOHNSON of Connecticut. Mr. Portman?

Mr. PORTMAN. Thank you, Madam Chair, and for bringing this

issue to the attention of the Congress a couple of years ago, I’m

glad we finally got the report from Treasury, a little late in terms

of the train leaving the station here in the House, but we are lucky

that it takes 30 days to make instant coffee in the Senate. [Laughter.]

Because it’s still hanging out over there, and hopefully, we can

make some of these changes. I think Chairman Johnson has made

a couple of good points that we ought to look at again.

I just want to review the bidding a little bit. Bill Coyne and I

look at this in terms of the Commission, and this subcommittee

added some things to it. We actually ended up with five or six pretty good provisions, I think, and I want to just go over those quickly

to make sure you support them all.

As a starting point, eliminating the understatement thresholds,

I think you just said that’s fine.

Mr. LUBICK. Yes, sir.

Mr. PORTMAN. And GAO has told us that’s going to add about

40,000 additional spouses a year, roughly. Do you agree with that,

more or less? So it will more than double the number of innocent

spouse cases probably?

Mr. LUBICK. Eliminating the threshold—I’m not sure. Do you

have the numbers [speaking with staff]?

Mr. PORTMAN. GAO has that in its report. I saw it. I would guess

you agree with that number?

Mr. LUBICK. These are potentials, not necessarily actual cases, I

believe.

Mr. PORTMAN. Okay. That’s your projection, though; is that correct? We’ll talk to GAO later.
25

The grossly erroneous standard, that was something that we took

out and made that merely ‘‘erroneous,’’ and it sounds like you agree

with that.

Mr. LUBICK. Yes. We do. We do. We agree with you.

Mr. PORTMAN. Okay.

The Tax Court jurisdiction, it sounds like you agree with that.

Mr. LUBICK. We do.

Mr. PORTMAN. Right now you have to pay the deficiency, and you

have to go file a case in the district court, I guess, and get back

your money you’ve already paid. And we’re saying the Tax Court

has jurisdiction. That’s in the legislation. You agree with that?

Mr. LUBICK. Right.

Mr. PORTMAN. Could you expand on that a little bit?

Mr. LUBICK. It’s not a deficiency, Mr. Portman; it’s the liability,

and then you sue for a refund of it——

Mr. PORTMAN. A refund of what——

Mr. LUBICK. We would stay the collection action and allow you

to——

Mr. PORTMAN. Okay. So you’re saying you agree we should have

accessibility to the Tax Court.

Mr. LUBICK. Full accessibility——

Mr. PORTMAN. And during that time period there should be a

suspension?

Mr. LUBICK. A suspension, yes, sir, unless there’s some jeopardy

or somebody’s about to run off to South America with large assets.

Mr. PORTMAN. Canada would be okay, but——

Mr. LUBICK. Pardon me?

Mr. PORTMAN. No, no. I could see us legislating on this.

Suspending collection actions can mean a lot of different things.

Are you suggesting that we authorize the Advocate, as we do with

some of the other cases to be able to make that decision or how

would you do the suspensions? With injured spouse or other hardship cases, we authorize the Advocate to suspend collection actions.

Is that how you would contemplate doing it?

Mr. LUBICK. I understand it’s automatic upon the application.

Mr. PORTMAN. So long as the innocent spouse criteria are met,

it’s automatic?

Mr. LUBICK. No. That would defeat the whole situation. The purpose is to determine——

Mr. PORTMAN. So as long as someone has applied——

Mr. LUBICK. As long as the innocent——

Mr. PORTMAN [continuing]. For the relief, that person would

be——

Mr. LUBICK. As long as the claimed innocent spouse applied for

the relief——

Mr. PORTMAN. Okay.

Mr. LUBICK [continuing]. Then that triggers it until it can be determined.

Mr. PORTMAN. Okay, it can be determined by the Tax Court?

Mr. LUBICK. Correct.

Mr. PORTMAN. Okay. So that’s a little different, I think, than our

legislation, and we would need to, as I understand it, change the

legislation slightly in that regard, but it’s the same idea.
26

The things the IRS is already doing I think are very helpful—

the separate form; that’s in our legislation. I think the IRS has the

authority to do that, and they’re moving ahead with it, as I understand it.

Mr. LUBICK. Yes, we are.

Mr. PORTMAN. Additional information is being provided. I understand instructions are being provided.

Mr. LUBICK. Yes, sir.

Mr. PORTMAN. That’s in the legislation. That’s being done. It

sounds like that’s already not only agreed to by Treasury, but

you’re moving ahead with that at the IRS.

There are two final ones. One would be the community-property

States issue, and I don’t know if we looked at that before, but that

seems to me something that makes a lot of sense that we would

want to add.

The final one gets into something where I think you have expressed different views on it in the past. I want to make sure that

we’re on the same page, and that’s this notion of relief being provided an apportioned or pro rata basis. Right now, if you are an

innocent spouse and you’re responsible for some of—let’s say 5 percent—of the so-called omission, under the current standard you

can’t get relief, or at least it’s not clear that you can get relief. We

need to clarify that standard. So we’ve codified that in our legislation.

That codification would say that, indeed, you can get pro rata relief. If you’re responsible for 5 percent of it, then you, would be on

the hook for that 5 percent, but not for the additional 95 percent.

Do you agree with that?

Mr. LUBICK. We think that’s a proper interpretation of present

law actually because the statute now gives you relief with respect

to omissions from gross income as to which you didn’t have knowledge, and it would be inequitable to hold the innocent spouse liable, and the same as to deductions. It seems to me the relief is

given on an item-by-item basis, if the criteria are met. So we don’t

have any problem with that. We think there was a court decision

to that effect which was correctly decided, and we think——

Mr. PORTMAN. Okay, that’s not in your Treasury report? That’s

not in the President’s budget? It’s not there because you think it’s

unnecessary to codify it?

Mr. LUBICK. I think that’s correct.

Mr. PORTMAN. Okay.

Mr. LUBICK. But we have no objection to it.

Mr. PORTMAN. Okay. I wondered if there was some disagreement

there. The Chair has raised a couple of other issues. Let me raise

just one other, and that’s this notion of not eliminating the current

knowledge standard, but doing something to clarify the standard.

It sounds like, from what you’ve said today, you’re not in favor of

eliminating the standard, but I think it was AICPA in a hearing

recently came up with some suggestions, where there might be

some factors that either could be codified or IRS could lay out

through administrative action and regulations, to determine what

knowledge means. Do you have a view on that?
27

Mr. LUBICK. I haven’t thought much about it, but to whatever extent we can make clear what the criteria are, we certainly are in

favor of doing that. There certainly can’t be any objection to——

Mr. PORTMAN. To trying to codify something?

Mr. LUBICK [continuing]. Indicating situations that would be illustrative of justifying relief.

Mr. PORTMAN. Okay. I think that’s about it in terms of additions.

I see my time is up. I have some other questions. Maybe we’ll get

back to them later. Thank you, Madam Chair.

Chairman JOHNSON of Connecticut. Mrs. Thurman?

Mrs. THURMAN. Mr. Lubick, I want to go back to some of the

questions that the chairman was talking about. I really can appreciate this marriage issue or at least the divorce decree. In listening

to the responses, I can see where the liability—thank God I’m not

going through a divorce; I think I’ve learned a few things here

today. But I guess the issue here is, for some of these folks—because when they do go through a divorce, they break up their assets or their liabilities, and they try to—some will come to agreement, and then, all of a sudden, the woman or the man, depending

on who gets this liability, ends up in the situation of saying, whoa,

wait a minute. And I can appreciate what you’re saying, though.

I have to tell you that there is a liability, and reading through the

report, both the GAO and yourselves have mentioned how difficult

this could be, and the 1.2 million divorces, and being involved in

all of that.

But I guess it’s the same issue that we go back to over and over

again, and that’s kind of the friendliness of this. I certainly think

that if I had to go talk to the ABA or to my Florida lawyers, I

would suggest to them, or to the accountants or whoever, you guys

need to make this very clear that this liability is not washed just

because of this decree. I think that is a part of their education responsibility to their profession.

But on the other side, if you do have a situation—and I’ll use

this because it most of the time goes this way: The wife gets the

house, and this might be where she goes then, because interest

rates are low, and things are wonderful; goes in, refinances it, gets

the money, puts it in the bank to get a college education because

she can’t count on the husband or the father to take care of those

situations, and then, all of a sudden, she gets hit with this.

What can we do—maybe it doesn’t have to be done legislatively

as much as it has to be just within our system. How do we make

sure that we have gone to the fullest extent of making the other

person who in this decree is liable for these liabilities? Is there

something we can do?

Mr. LUBICK. I would suggest that, if I were a judge or if I were

a party who knew I had a secondary liability on this obligation, I

would try to set up some third-party arrangement, a trust arrangement, or an agency arrangement, or an escrow arrangement. If

we’re talking about the assets that the parties have and they’re

carving them up, and the assets have to meet the obligations, it

seems to me a procedure can easily be set up to make sure that

those liabilities are discharged. There are all kinds of security arrangements that the spouse who assumes the obligation can give

in the remaining properties, particularly if it’s real property, to se-
28

cure the performance of those obligations. There are legal techniques that can be done.

Now, obviously, every person going to divorce court doesn’t have

a lawyer necessarily who’s aware of all this, but the judges ought

to know it, for crying outloud——

Mrs. THURMAN. Okay, well, then maybe there’s a question for

you. Are we doing something from the IRS? We’ve talked an awful

lot about giving information out to the taxpayers and to businesses

and to different organizations and groups, so that they feel friendlier toward the IRS. Are we doing an educational system with those

that would be in this situation or potentially are making these decisions?

Mr. LUBICK. I think the problem here, at least in the case that

engendered this discussion, was that the divorce occurred prior to

the IRS coming into the picture, which makes it a little difficult for

the——

Mrs. THURMAN. However, though, if—not really, because——

Mr. LUBICK. But you’re right.

Mrs. THURMAN. Personally, you’re not involved with it, but if the

judge is making a determination on liabilities in that divorce, then

they are; the judge is involved. What I’m wondering is—is this a

situation that we should go to our State courts or divorce attorneys,

or is it continuing education? There has got to be a way for them

to get into this.

Mr. LUBICK. I think there’s some good points there. First of all,

we indicated that we are going to expand the materials, the educational materials, that are furnished to taxpayers, so that at the

time of making out the returns—I don’t know if the innocent

spouse is going to read the instructions——

Mrs. THURMAN. Right.

Mr. LUBICK [continuing]. To the form. That may not be realistic.

Mrs. THURMAN. Sure.

Mr. LUBICK. But we are certainly focusing—as we indicated, one

of our proposals administratively is to focus outreach on both the

national and local levels to community organizations that served

abused or battered spouses, and we——

Mrs. THURMAN. Don’t agree to it. I mean, it would be real easy;

just don’t agree to it.

Mr. LUBICK. Well, I think that’s right. You are in a consensual

situation between two parties, and you’re trying to modify the

rights of a third party who wasn’t a party to the proceeding. That’s

where I got stuck with Ms. Johnson——

Mrs. THURMAN. Before my time runs out, though, let me ask you

this: Knowing that this decree is in effect, and when you have a

situation like this come up, what can the IRS do, or what are they

doing, or do you think they’re doing, to try to fulfill that decree?

I mean, to make sure that the liability is placed on the person that

it’s supposed to be.

Mr. LUBICK. I think you’ve put your finger on what I think is the

most disturbing part of this whole problem, which is that—and I

think it’s produced the most dramatic of the examples; that there

have been some particular agents who are hard-nosed and unsympathetic and——

Mrs. THURMAN. And done nothing to go after the other person?
29

Mr. LUBICK. Right, and there are illustrations of that. I think

that is precisely the situation that the Commissioner has undertaken to turn around, because his theme, as you have heard, is customer service and training the IRS agents to be sensitive to people

and to provide taxpayer advocate assistance in all of these cases.

A lot of it is personal relations, interpersonal relations, and how

you handle it. There is no question but what, if we didn’t have a

lot of these examples where you have insensitive officers pursuing

collection, the situation would not have been so exacerbated. And

I think while revenue agents aren’t normally repositories of the

milk of human kindness in superabundance—[Laughter]—I think

there has to be—there are ways of doing things and other ways of

doing things, and the training of the tax administrators to respect

taxpayer rights, which has been emphasized so much from this

committee and others in the Congress. And the appointment of

Commissioner Rossotti I think is going to lead to a kinder, gentler

Internal Revenue Service, if you will.

Mrs. THURMAN. Well, I know I can only speak for myself, but,

hopefully, that we think there is a way to do this right.

Chairman JOHNSON of Connecticut. Mr. Weller.

Mr. WELLER. Thank you, Madam Chairman. And Mr. Secretary,

good to see you today.

Mr. LUBICK. Good to see you, sir.

Mr. WELLER. I want to again thank the Chair for her leadership

on this issue and for continuing to focus attention on an issue

which is pretty meaningful back home with the folks that I represent. I often think, in terms of innocent spouses, of victims who

have contacted my congressional office seeking help; usually about

half a dozen a year have contacted our office. In talking with colleagues, maybe multiply that, it starts adding up of those who have

been victims. The unfortunate thing is they’ve gone through the

tragedy of breakup of a marriage and a divorce, and in many cases

the innocent spouse is not only the victim, or haven’t experienced

that tragedy, but their former husband may be—usually is a deadbeat dad, if he’s a deadbeat taxpayer, and the IRS, the tax collector, shows up at her door because they can find her, but they

can’t find him.

One of the most obvious problems I find in just looking at the

issue in general is that the IRS looks for the most available spouse.

I’m just trying to get a better understanding of what the IRS—

what Treasury is proposing to do to address that particular problem of just going after the first available spouse that they can find

and sticking her with the bill.

Mr. LUBICK. Well, that’s a question of tax administration, and I

think you’re right; generally, the tendency of a collector, a bill collector, is to find some assets that he can seize. It seems to me,

again, through our instructions to agents and our basic training of

agents, which we have indicated we are sensitizing them to the

problems of innocent spouses, and I’m hopeful that this training

will take and that they will have regard for the image of the organization they represent, the Internal Revenue Service. They should

be proud to be officers of the Internal Revenue Service, and it

should conduct itself in a very honorable fashion.
30

If we have eliminated, as the Commissioner has promised, the

notion of just quotas, getting in as many dollars as you can, without regard to the sensitivities of the human beings you’re dealing

with, if that has gone by the boards, as I believe it has, then I

think you’re going to see a change in attitude and a change in culture that, while it’s something intangible, I think it will result in

better treatment. There are always going to be cases where people

will differ as to what should be done, but I think in the cases

where the chairman has indicated, the liability is essentially that

of one of the contracting parties, every effort should clearly be

made to follow that——

Mr. WELLER. But, Secretary Lubick, I think what I’m—one of the

points or, actually, issues I’d like to see is, in the case, before you

go out and find the first person you can find in the couple, usually

the unlucky mom who has the kids and is struggling to make ends

meet, and her husband is not paying child support, and now the

tax collector’s at the door—what efforts are you taking to review

the case before you put this poor, innocent spouse through the

mental anguish of an additional—you know, the tax collector being

at the door? She’s already gone through the case. Usually, in many

cases, at least those I’ve experienced, where child support’s not

being collected, and she’s already gone through the tragedy of a divorce, and then the tax collector shows up at the door and puts her

through the mental anguish of saying he also wants a lot of money

in back taxes. What precautions is the agency making to ensure

that this particular innocent spouse is actually liable——

Mr. LUBICK. That’s something——

Mr. WELLER [continuing]. For the tax burden?

Mr. LUBICK. I don’t have personal knowledge of what the Commissioner has attempted to do in that area, but I will assure you

of this: I will suggest to the Commissioner—I will take back the

statement that you’ve made and the question that you’ve made and

say that they ought to, if they’re going after one member of a marital community, understand what the situation is between the two

of them, and clearly suggest that their primary effort ought to be

directed to the appropriate party, determined after a review of the

entire matrimonial situation.

Mr. WELLER. Because my experience is this is very—I mean, the

tax collector at the door is a pretty traumatic experience for anyone, let alone someone who’s struggling with other issues. I was

just wondering—some have suggested proportional liability as one

of the solutions. I was wondering, can you make some sort of preliminary determination, which you’re referring to, but also in the

notification of this particular outstanding—or person, this innocent

spouse, who’s being contacted by the IRS; can you somehow outline

what the liability is in the case of her former husband owing taxes?

Mr. LUBICK. Well, we have already introduced a number of educational and administrative remedies to make sure that, if you’re

really dealing with the innocent spouse, using the technical term

that we’ve been referring to in these hearings, one that’s entitled

to relief, to make sure that that person knows what her or his results are, to make sure that that potential innocent spouse is advised of her or his rights, and to make sure that action is not

taken. We are trying to review the training materials to ensure
31

that the agents have responsibility to identify situations where the

innocent spouse provisions might apply, even where the taxpayer

doesn’t know about the process. So in those situations, we are taking as strong measures as we possibly can to get our officers in the

field alerting the taxpayers and making sure that we try to uncover

these cases before the axe falls on their neck.

Mr. WELLER. Well, I look forward to hearing the Commissioner’s

response to that request. Because, like I say, in the cases I’ve experienced with contacts with my office, the emotional trauma that

this innocent spouse is going through is pretty demanding on her

situation, and I think it’s very important that the IRS, before they

contact her, second-guess themselves, and also ensure that she actually is liable before they put her through the emotional trauma

of trying to defend herself for someone else’s tax liability.

So thank you, Madam Chair. I see my time has expired.

Chairman JOHNSON of Connecticut. Thank you, Mr. Weller.

Mr. Lubick, in answer to my earlier question, you said that the

IRS could let the woman who had worked hard and saved off the

hook; the IRS had the power to do that. Would that decision be

contingent on the other party paying off the tax liability?

Mr. LUBICK. It’s a bargaining situation. It’s a contractual situation. I’ve been in those situations myself, representing people, involving several parties, and where agreements were——

Chairman JOHNSON of Connecticut. But, practically, is it ever so

that an IRS agent will let one party with assets completely off the

hook and hold the other party liable, and would free that person

from any obligation before the other party had actually paid their

liability?

Mr. LUBICK. I think when the officers consider these agreements,

they get financial statements of both parties. If the primary party,

primarily responsible party, has the assets, then that, I think,

could very well be part of the settlement. Now if you’re talking

about the situation where——

Chairman JOHNSON of Connecticut. But if the primarily responsible party doesn’t have the assets——

Mr. LUBICK. You’re talking about where the primarily

responsible——

Chairman JOHNSON of Connecticut [continuing]. And has to pay

over a long period of time, it’s very unlikely the IRS is going to free

the not responsible party who has assets?

Mr. LUBICK. I think it depends on the comparative financial situation, but, again, as I indicate, there are also security arrangements that can be made——

Chairman JOHNSON of Connecticut. I very much appreciate not

only Mr. Rossotti’s attitude, but the IRS’s effort over the last two

years, which has been substantial, to change its attitude, to think

more straight, to be more direct with the Congress and the American taxpayer, to recognize problems that have happened in the

past. But I don’t think we make any progress when we don’t provide a structure of law that is concerned with justice as well as collection, and the problem has been that the IRS’s primary concern

is collection. There’s a point at which justice matters. That is

throughout our law.
32

I have to tell you that I am very concerned with the fact that we

have no protection, in a sense, for a just settlement with the responsible spouse. I don’t see any problem with the ABA’s proposal

that the allocation of tax items and the separation of a tax liability

or assessment would occur only in two instances: upon an election

by one spouse following an assessment of unpaid tax or upon the

assertion of deficiency of tax. You could even narrow this more to

focus only on situations of divorce.

But, you know, you look at how they’re going to deal with allocations, and the spouse seeking to separate the liability would have

to provide the information needed; the other party could challenge

it. In most of these cases, these people are not at a point in life

where they have a very complex tax return, and the kinds of recommendations the ABA is making is that failure to report earned

income, deficiencies would be based upon failure to report income.

That income would be assessed solely against the party that earned

the income. That doesn’t take a rocket scientist to see that that’s

fair.

Now maybe the other party, in this case, this woman who clearly

paid taxes on her wages, had the withholding and the medicare

and the social security, and then her husband, who wasn’t reporting his income, why is it so hard for the Government to say,

‘‘You’re right; that’s his income. He has now reported it. He is liable for the taxes, and you, Lady, are legally free to go, and we will

deal with him.’’?

It just seems to me that the IRS’s obsession with collection,

which I respect—after all, we all depend on the taxes getting collected to pay for the roads and bridges and the children in their

schools, but at a certain point justice matters, and that’s what

we’re talking about here. None of the procedural recommendations

that you’ve made, as important as they are—and they’re nice—

none of them go to the heart of this matter that says, where one

spouse has fulfilled their full obligations as a wage-earning, taxpaying American, they can get complete relief, and we, the rest of

the public, will struggle with their nonperforming spouse, and if

the nonperforming spouse in the end doesn’t pay all their taxes, we

will attach him; we’ll keep that 10-year liability in case he wins the

lottery, but we’re not going to penalize the person who did right,

worked hard, and paid their taxes. You’re not reaching that bottom

line, I have to tell you.

When the taxpayer advocates make this recommendation, it’s because they’re negotiating these kinds of agreements. They’re the

guys out in the front line in your kinder and gentler IRS, and I’m

convinced we’re going to have a kinder and gentler IRS, but the

kinder and gentler tax advocates have to have some structure of

law that allows them to accept what they perceived as a just settlement, not only the maximum collectible settlement. And now they

only have maximum collectibles.

I really think you’ve got to work with us in the next few weeks

over a far more aggressive approach as to how we deal with the

legally-divided liabilities in divorce decrees, and under what circumstances do we allow a retroactive separation of tax liability?

How do we allow ourselves the right of a certain time, when we can

see things have gone afoul, to go back and file separately? And give
33

the taxpayers the primary responsibility to justify all that and to

allocate all that. As I say, I can’t believe in many of these cases

these are terribly complicated tax returns. I mean, they’re not usually that really big money, but, anyway, there certainly would be

some that were very good money.

Mr. LUBICK. Well, you know, we’re going to work with you as

much as we can. I——

Chairman JOHNSON of Connecticut. I hope you’ll go home and

think about——

Mr. LUBICK. I will.

Chairwoman JOHNSON of Connecticut [continuing]. Justice, not

just collections.

Mr. LUBICK. We will not only think about justice, Madam Chairman, but also some mercy.

Chairman JOHNSON of Connecticut. Thank you. Mandated mercy.

Thank you. [Laughter.]

We’ll move on to the GAO. It’s a pleasure to welcome back Lynda

Willis, the Director of Tax Policy and Administration Issues; accompanied by Ralph Block, the Assistant Director of Tax Policy and

Administrative Issues, and Jonda Van Pelt, Senior Evaluator of

Tax Policy and Administrative Issues.

Welcome. It’s always a pleasure to have you before our committee.

STATEMENT OF LYNDA D. WILLIS, DIRECTOR, TAX POLICY

AND ADMINISTRATION ISSUES; ACCOMPANIED BY RALPH

BLOCK, ASSISTANT DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, AND JONDA VAN PELT, SENIOR EVALUATOR, TAX POLICY AND ADMINISTRATION ISSUES

Ms. WILLIS. Good afternoon. Madam Chairman, with your permission, I’ll submit my entire written statement for the record, and

I will give you a brief summary of my statement that touches on

points that weren’t covered at length in Mr. Lubick’s statement. As

you’re aware, our reports have a lot in common.

We’re pleased to be here today to discuss the innocent spouse

provisions of the Internal Revenue Code. Like the Department of

Treasury, we were mandated to report to the Congress on issues

related to joint and several liability, as well as the application of

the innocent spouse provisions. My comments today are based on

our report. Our report has findings, and in several cases recommendations, similar to those in the Treasury report. My testimony today makes the following points:

First, under current law, only about 1 percent of the couples who

filed joint returns in 1992 had additional tax assessments that potentially met the dollar threshold for innocent spouse relief.

Second, the limited information available indicated that IRS received few requests for innocent spouse relief and denied most of

these.

Third, the current provisions in the law may not ensure that all

deserving taxpayers receive equivalent treatment.

And, fourth, several options exist for administering proportionate

liability.

I’d like to discuss each of these points in a little more detail, but,

first, I’d like to give you two examples illustrating the types of
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cases that we found when we examined the application of the innocent spouse provisions.

In the first case, a taxpayer learned of an assessment of over $3,000 against a 1985 joint return when IRS levied her wages in

1992. The assessment was generated primarily by her ex-husband’s

disallowed moving and business expenses, although he also had

some unreported income. The taxpayer submitted documentation

demonstrating that the unreported income was generated by her

husband and received relief for about $200. According to an IRS official, she could not substantiate her husband’s disallowed expenses

and was held liable for the remainder of the tax.

In the second case, a taxpayer’s ex-husband, a wanted fugitive,

had not paid the tax reported for two tax years. The taxpayer remarried, and IRS placed liens against her new husband’s property.

IRS denied innocent spouse relief, in part, because the liability was

for taxes reported on the joint return, rather than taxes assessed

after the return was filed; that is, there was an underpayment of

tax rather than an understatement of tax. IRS did accept an offer

in compromise for both years, and for a third year, where the exhusband had failed to report income.

Madam Chairman, we do not know how typical these cases are

or even how many requests for innocent spouse requests are made.

Because IRS did not have data on the number of innocent spouse

requests filed, we developed an estimate of the potential universe

by analyzing data related to the 1.2 million joint returns which

were assessed additional taxes under IRS’s 1992 audit and underreporter programs. That was the latest data that was available to

us at the time that we did the report.

Of these 1.2 million returns, about 587,000 had additional tax assessments exceeding $500, which is the minimum dollar threshold

required for innocent spouse relief. I’d like to point out that our estimate of 587,000 represents the maximum number of couples potentially eligible for innocent spouse relief. Fewer would actually

qualify.

For instance, some couples were probably assessed additional

taxes as a result of overstated deductions, credits, or bases which

have higher dollar thresholds. Further, some of the couples may

not have qualified for innocent spouse protection because they both

knew there was a substantial tax understatement.

Since divorced taxpayers seek innocent spouse relief most frequently, we also estimated the number of taxpayers who could potentially be eligible for relief and may have divorced during the

three years since the 1992 joint returns were filed. Using a 2 percent per year divorce rate from the Department of Census, we estimated that 35,000 divorced couples had additional tax assessments

of over $500.

Madam Chairman, although innocent spouse relief is clearly established in law and regulation, we observed that little information

about the criteria for granting it or how to apply for it was available from IRS. The innocent spouse relief provisions are described

in several IRS publications, but these publications do not provide

any guidance on how to request relief. Furthermore, these publications are developed to help taxpayers prepare their returns, which

is far in advance of the time that taxpayers might need information
35

on innocent spouse relief. The publications most directly related to

the enforcement and collection procedures are totally silent about

innocent spouse relief.

Some IRS staff are as confused as taxpayers about how to request relief. The various IRS units we contacted took different approaches to providing relief. For example, two district offices granted relief using offers in compromise based on doubt as to liability,

while staff at one service center routinely denied such requests as

inappropriate.

In addition, the current provisions may not ensure the taxpayers

receive equitable relief. For example, the dollar thresholds represent an eligibility criteria for relief based on income or the size

of the liability. These criteria appear to be more related to an ability to pay or degree of hardship than to the innocence of the taxpayer. The logic behind the income thresholds for deductions, credits, and bases is particularly cloudy because the potential innocent

spouse’s income is based on the tax year ending before the notice

of deficiency, which may be several years after the tax year of the

joint return, and must include the income of any new spouse.

Finally, the dollar thresholds prevent taxpayers with smaller liabilities from obtaining relief since the minimum understatement

in all cases must be more than $500. We estimated that if the dollar thresholds were eliminated, the maximum number of couples

filing tax year 1992 returns potentially eligible for relief would

have been about 1.2 million.

Treasury’s February report indicates that IRS is currently undertaking a number of actions to improve the administration of the

current innocent spouse provisions. Several of these actions were

recommended in our report, including a new form which will be

processed in a central location to assist taxpayers in preparing

claims for innocent spouse relief, changes to IRS forms and publications, and efforts to ensure that employees are properly trained to

assist taxpayers. We believe these and other proposed administrative actions, if implemented effectively, should make more taxpayers aware of their rights under the innocent spouse provisions

and provide for more consistent application of the provisions by

IRS employees.

Treasury’s report also made three statutory recommendations related to problems discussed in our report. One dealt with making

it easier to qualify for innocent spouse relief by changing statutory

standards to help additional taxpayers, including those with smaller liabilities. These changes would include lowering or eliminating

the income thresholds, allowing relief to cover underpayment as

well as understatement of tax and eliminating the no basis in fact

or law requirement for erroneously-claimed deduction credit or

bases. While we did not recommend any of these changes, our report did point out similar problems with these provisions.

In summary, Madam Chairman, we found that the existing innocent spouse provisions are complex, difficult to understand, and

pose a serious challenge for IRS and taxpayers. In addition, they

result in the inequitable treatment of taxpayers. There are both administrative and statutory options for improving the innocent

spouse provisions. On the administrative level, we have made recommendations for improvements that we believe should be under-
36

taken regardless of whether there are changes made to the statute.

On the statutory level, repeal of the qualifying thresholds and the

inclusion of erroneous deductions and underpayment as well as understatement of tax could make the provisions less complex and

more equitable.

Finally, there is the issue of replacing the joint and several liability standard with a proportionate liability standard. There are several alternatives for doing this which are discussed in our report.

Each of these represents tradeoffs between establishing individual

taxpayer liability and the amount of paperwork and administrative

burden created for taxpayers and IRS.

Madam Chairman, that concludes my statement. I’d be happy to

answer any questions you may have.

[The prepared statement follows:]
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Chairman JOHNSON of Connecticut. Thank you.

I notice in your testimony you do not support recognition of divorce decrees. Why do you think this would be so difficult or inappropriate?

Ms. WILLIS. Well, Madam Chairman, I think some of the reasons

that Mr. Lubick pointed out are very real concerns to us: the fact

that taxpayers could manipulate the division of assets versus liabilities to the disadvantage of the Government; the fact that it does

place the Government in a different position than other creditors

around the issue of the economic debts of that——

Chairman JOHNSON of Connecticut. May I just interrupt there?

Do you think that doesn’t go on now?

Ms. WILLIS. Oh, I’m sure to some extent——

Chairman JOHNSON of Connecticut. In divorce decrees, tax consequences aren’t considered?

Ms. WILLIS. Oh, absolutely. I’m just suggesting that binding IRS

to divorce decrees would offer additional opportunities to manipulate tax liabilities, and I think there are two things that weren’t

discussed from an administrative perspective that might limit the

effectiveness of divorce decrees in protecting innocent spouses. One

is, if you notice in the first example that I gave you, that this was

a 1985 tax return and that the person did not find out about the

additional liability until 1992. So at the time the divorce decree

was finalized, this was not a known liability. So it would not have

been something that potentially would have even been

contemplated——

Chairman JOHNSON of Connecticut. Right, I understand that,

and many divorce decrees would be silent on this issue.

Ms. WILLIS. Yes.

Chairman JOHNSON of Connecticut. But where the divorce decree

is not silent and specifically allocates, why—especially when it was

discovered later on, so clearly it probably wasn’t part of the divorce

decree decisionmaking process any more than tax consequences are

always taken into account when any distribution of property is taking place or any change in investments and ownership issues. So

why wouldn’t we give a divorce decree that has a specific decision

in it in regard to taxes standing? Why wouldn’t we protect that taxpayer against now having to pay a liability that was offset by other

liabilities assumed at the time? I don’t see that that provides a big

incentive to get involved in taxes and divorce decrees—when

there’s already incentive for tax considerations to be considered in

divorce decrees.

Ms. WILLIS. When the joint return is filed, that couple is viewed

as a single economic unit that incurs not only the tax liabilities of

that return but of future returns, in addition to any other debt, liabilities, et cetera, as a unit, and the divorce decrees right now do

not have the ability to separate for creditors the liability for individual components of the debt. Could you do that? You could, but

in doing that, the Congress would be taking the tax debt and allowing it to be allocated to individual parties in a way that is not done

for other types of debt within the decree.

I think you would also have to wonder whether you still wouldn’t

need innocent spouse relief in cases where potentially one spouse

or the other was taken advantage of in the divorce decree. So I
62

think that, rather than having the divorce decrees come into account, we need better provisions for dealing with situations like the

one that you laid out, where there is an innocent spouse involved.

Chairman JOHNSON of Connecticut. Would it be a problem to give

the divorce decree some weight? Not 100 percent weight, but that

it would be one of the things that the IRS would have to take into

consideration?

Ms. WILLIS. The divorce decree could be considered. Right now

when IRS looks at collecting the debt, they look at the economic situation of the individual parties. They can offer hardship.

Chairman JOHNSON of Connecticut. Well, see, they do look at the

individual economic situations of the two parties. If they can’t find

one party, they look at the economic situation of the one party.

That’s unfair. If they look at both parties and one’s got a lower income but could pay over a longer period of time, and was specifically allocated this responsibility, that should carry some weight.

I can see that maybe you wouldn’t want it to be absolute because

you might want to be able to look back and say, no, clearly, they

had this in mind and this was a—I mean, we can’t accept that. But

it does seem to me that it ought to carry some significant weight.

Ms. WILLIS. And in the case of the letter that you read from the

woman from California, I’m a little puzzled as to why IRS didn’t

offer an installment agreement to the party who was willing to assume responsibility for the debt.

Chairman JOHNSON of Connecticut. Right. I think what I see in

that is this person just saw that money there; they wanted to get

it settled, and the installment situation should be worked out between her and—I mean, I don’t know why, but the fact is that we

will never be able to protect people against other people who aren’t

doing their jobs with sensitivity and fairness. That’s why the law

has to do a little more than we’re proposing at this time to put in

a sense of fairness.

You read through some of these other letters, too. I mean, they’re

appalling. It’s simply appalling. So to say that we have a new head

of the IRS and we’re going to be good guys now, and to say that

the kind of changes that we’ve made, all of which are useful—and

I agree, you can’t do one thing; you have to do a number of things,

but why can’t—why shouldn’t standing for a divorce decree be one

of the things we do? Maybe not 100 percent standing, but maybe

it would have standing unless there is written explanation from the

IRS as to why this is clearly not appropriate, or it would have

standing unless challenged by the spouse who had to pay it as to

why it was clearly not appropriate. I’m not using the right language, but somebody knows what it is. Why is it that we can’t—

and I was very interested in your presentation and found it very

helpful about the proportional liability standard issue. Why can’t

we combine some of that with the ABA’s approach, that under certain circumstances that one could trigger this separation, this review, of your tax returns and try to get a more honest evaluation

of where the tax liability lay? That doesn’t seem to me all that

hard.

Ms. WILLIS. There is no reason why you couldn’t give the Secretary of the Treasury the ability to adopt regulations that would

allow for the enforcement of these types of criteria and consider-
63

ations. I think one of the things that we’d be most concerned about

is that they be developed in a way that is truly effective.

I mean, for example, in a divorce decree, if a woman wishes to

get out and simply agrees to whatever half the taxes are, based on

what she knows today, and it turns out down the road that she

owes $300,000 extra because of an unknown tax liability that just

came out of an audit process, that divorce decree is not going to

protect that party. So I think we have to make sure that we have

the ability to protect parties in that case as well. But certainly

there could be more put into the regulations in terms of what could

be considered, how liability could be proportioned, things that could

be taken into account.

I think there’s also things that need to be done in terms of IRS

trying to find both spouses. Picking the low-hanging fruit by going

after the spouse most easily found is definitely an issue. It’s an

issue with most collection agencies, not just IRS. So making sure

that there are steps taken, that IRS makes a good-faith effort to

bind both spouses and pursues the assets of both spouses is something that probably needs to be emphasized.

One of the troubling things is the amount of time it takes before

many of these people find out they have a tax liability, expecially

when only one spouse received the notices—and IRS is taking some

steps in that regard by sending notices out to both parties. But I

think that’s another area where IRS needs to make sure earlier in

the process that both parties to the joint return are aware of what’s

happening in terms of changes to the tax assessment.

But I also think that to statutorily address many of the cases

that came up before Senate Finance—and I’m sure cases you’ve

seen—you have to deal with the issue of underpayment versus understatement, because that appears to be causing a great deal of

anguish and misunderstanding, and IRS can do nothing about underpayment. Underpayment is not covered by the innocent spouse

provisions in the code. The provisions only cover understatement of

tax. So that would be another way where you could get into more

of these hardship cases.

Chairman JOHNSON of Connecticut. Thank you very much.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman.

Your report indicates that the IRS does not now track how often

the innocent spouse relief is requested, granted, or denied, but it

appears that relief is usually denied. Should the IRS track claims

for innocent spouse relief, and if you think they should, why?

Ms. WILLIS. Mr. Coyne, we think IRS should track claims for innocent spouse relief for a number of reasons. First is to have a

sense of how big the problem is, how many requests they have for

innocent spouse relief, but also in terms of understanding what is

driving the request for relief and whether there is more that IRS

could do from an outreach or a taxpayer education perspective to

prevent these situations from happening and identify for themselves and for the Congress systemic issues that need to be resolved to prevent these types of circumstances in the first place.

Many of the things that we’re talking about are of just basic administrative kinds of things. Because the program applies to few
64

taxpayers, it’s an exception-based program; it hasn’t gotten much

attention.

Mr. COYNE. How does the IRS’s Taxpayer Advocate Office handle

innocent spouse situations? Were you able to find that out?

Ms. WILLIS. Well, we looked at cases that came into the Problem

Resolution Office, which is this part of the Taxpayer Advocate’s Office, and they basically process them through like they do other

problem cases in terms of working with the line staff to determine

whether innocent spouse relief is actually warranted, et cetera. In

fact, the Problem Resolution Office and the Offers in Compromise

Program were the two places we found most of the requests that

we found.

Mr. COYNE. Does the Advocate’s Office ever grant relief on equitable grounds, as was spoken about earlier, or do they ever reverse

a denial of relief by the Collection Division?

Ms. WILLIS. I am not aware of any circumstance or any cases

where that has taken place.

Mr. COYNE. You didn’t run across that at all?

Ms. WILLIS. No.

Mr. COYNE. All right, thank you.

Chairman JOHNSON of Connecticut. Mr. Portman?

Mr. PORTMAN. We’re going to have all those new TAO’s coming

out now, legislation. So maybe they can be used in that regard.

Quickly, just following up on Mr. Coyne’s questions, the work

that you did I think was very helpful, and you know probably more

about how the IRS actually handles this, and could handle it, than

any organization. So maybe you can help us a little in terms of

what’s practical.

With regard to the form itself, how are they going to centrally

process and administer it, so that it’s getting out to everybody and

so that there’s equitable treatment of taxpayers? You mentioned

that some of these end up—in response to Mr. Coyne’s question—

with the taxpayer advocate; others end up in other offices like offers in compromise or other areas. Are you confident that they are

going to be able to do what they are indicating they’d like to do,

which is to have a form that is provided to people in an equitable

manner?

Ms. WILLIS. I think it’s doable. I think what they are proposing

is doable. Most of the recommendations that were in the Treasury

report and the things that came up in Treasury’s testimony are

fairly recent actions that are being undertaken, and we don’t have

a lot of detail about exactly how they’re going to do this yet. I think

one of the questions about central processing gets back to the question of how many requests for relief they have and where they’re

going to be processed, by whom, et cetera. I understand that IRS

is working on that, but certainly processing claims in a central location would allow IRS to bring together an aggregate level of expertise to be able to review these requests and also to identify some

systemic problems, that could be hopefully resolved once and for

all.

Mr. PORTMAN. It would be helpful if you could give us some specific advice, not necessarily today, but maybe in writing, on how to

centralize that. The concern that we would have I think would be

that there would be one entity within the IRS, along the lines of
65

the Commissioner’s new notions of reorganization, that would actually be able to fairly and equitably resolve these matters as quickly

as possible, give taxpayers a response, and do so in a way that applies the same criteria by the same people, or at least people with

the same background and training and sensitivity. So that you

wouldn’t have disparate treatment, which we see in so many areas.

From what your report tells me, right now it’s spread out among

various areas; there’s a danger of that happening.

Ms. WILLIS. Yes.

Mr. PORTMAN. The other thing I think that is important is the

extent to which you think Treasury’s regulations need to be enforced by us in some way, report language or otherwise, so that the

IRS actually follows through on them. Do you see a disconnect

there? Are you comfortable that the Treasury ideas that are expressed in the budget, and so on, are going to be mandated in such

a way that they actually happen at the level of the IRS?

Ms. WILLIS. I think the current——

Mr. PORTMAN. Is that the current view?

Ms. WILLIS. I think the current commitment is there.

Mr. PORTMAN. Okay.

Ms. WILLIS. But I think, obviously, as with any program that’s

put in place by individual Commissioners, it can also be changed

at any time. As far as the regulations go, what we found when we

did our work is that the IRS regulations haven’t been changed

since the 1984 provisions were changed. So the regulations right

now are quite a bit out of date.

Mr. PORTMAN. And those regulations are regulations some of

which we codify in the legislation; is that correct? And so your suggestion, it sounds to me—what I’m inferring from what you’re saying is we ought to consider codifying some of those, including the

requirement for a form, so that that’s something that the IRS not

only does in a way that’s consistent with what we all think should

be done, but is followed through on.

Ms. WILLIS. Codifying would better assure that.

Mr. PORTMAN. Okay. I think you can help us a lot in terms of

these issues: centralization, fairness, equity in terms of how stuff

is processed and dealt with, but also in terms of this notion that

the Chair has on divorce decrees. I’m not at all expert on this, and

I don’t understand the issue well enough. I’m going to try to figure

out more about it, but there may be a way, from what the Chair

has been saying, that the IRS could be encouraged to respect those

decrees, unless there is some unreasonableness or some other reason. In other words, have almost a presumption of correctness.

That would be helpful to me, to hear your views on that, again,

today, if you have them, or in writing.

That’s all I have, Madam Chair.

I don’t know if you want to respond to that now.

Ms. WILLIS. Not right now. Thank you.

Chairman JOHNSON of Connecticut. Let me just ask you a couple

of things. I would assume from your comments on proportionality,

proportional liability, that you would agree that front-end proportionate liability would be a big problem, whereas back-end, arising

out of a claim for innocent spouse relief would not be such a problem?
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Ms. WILLIS. It would certainly reduce the amount of paperwork

both for IRS and taxpayers, and the cost involved. We looked at

what it would cost to process the additional tax returns, if you had

people file separately, and you’re looking at close to $200 million.

Even if you’re just looking at having them put separate items on

the line, you’re still looking at close to $20 million. So if you do it

only when you have a claim for relief, you reduce the number of

taxpayers and the amount of cases that IRS has to work with.

Chairman JOHNSON of Connecticut. Can you make any generalization about the size and the complexity of the returns in which

there’s an innocent spouse claim? Am I right in kind of thinking,

when you look at the average age of divorce, and for the most part

it’s not at the time of life where you have saved a lot of assets—

there’s the home; there’s the car; there’s debts——

Ms. WILLIS. You’re going to have a lot of those returns that are

fairly simple, straightforward kinds of returns. We looked at being

able to trace the income that’s on a return, and found that for 77

percent of the income on joint returns you could identify which

spouse the income should be assigned to. It is more difficult with

deductions, credits, et cetera, but a lot of people have very straightforward, basic returns, so it would not be as difficult to make these

decisions.

Chairman JOHNSON of Connecticut. Was that taken into account

with your estimate of $20 million, the minimum that it costs at the

IRS?

Ms. WILLIS. That was basically just the returns processing cost,

right.

Chairman JOHNSON of Connecticut. And do you have any specific

comment on the ABA’s proposal?

Ms. WILLIS. No, it’s basically back-end.

Chairman JOHNSON of Connecticut. Yes, it is.

And then, lastly, income understatement versus deduction understatement, how different are the dilemmas they pose for the IRS?

And should we be looking at some things in one area that we may

not be capable of providing in the other area?

Ms. WILLIS. Well, income understatement tends to be easier to

allot to a particular taxpayer. As I said, you can generally trace it.

Whereas, the deductions may not be. Plus, the standard right now

for deductions is that there may be no basis in fact around them,

which is a difficult standard for people to meet, as opposed to just

plain erroneous. So, I mean, I think basically the Department’s recommendation that you treat all of those the same with no differing

thresholds would certainly make relief available to more taxpayers

and be more easily administered.

Chairman JOHNSON of Connecticut. Thank you very much.

Ms. WILLIS. Thank you.

Chairman JOHNSON of Connecticut. We appreciate your testifying

and we look forward to working with you on this. Thank you.

[Whereupon, at 3:41 p.m., the hearing adjourned subject to the

call of the Chair.]

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